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Throw This Stock Away

If you find something better, replace it.

I didn't want to toss this week's company, but yesterday's earnings report left me with little choice.

For those following this column, every week I recommend that investors dump a particular stock. The venom is swift, but it comes with a sweet aftertaste. Why? Well, because I come right back with three stock recommendations to replace the company that I'm dissing.

This week's pick stings because I have a soft spot for America Online. I was -- and remain -- one of its earliest access subscribers. AOL helped me discover The Motley Fool, and I began writing for the site all the way back in 1995. AOL was one of the earliest investors in the company.

However, so much has gone wrong since AOL's ill-advised merger with an old-school media giant. I've looked the other way, but I can't avoid the stench any longer.

I have no choice but to toss out Time Warner(NYSE:TWX).

Go for the gold, settle for the silverEverything that is wrong with Time Warner as an investment can be summed up as pivot points from yesterday's second-quarter report.

Growth is anemic, with revenue and adjusted operating profits rising a mere 5% and 4%, respectively.

Time Warner Cable(NYSE:TWC) remains a bright spot -- accounting for a third of its revenue and nearly half of its adjusted operating income before depreciation and amortization -- but Time Warner is in the process of separating itself from its cable spinoff.

AOL continues to bleed members. There are now just 8.1 million stateside access subscribers, 2.8 million fewer than the company had a year ago. Online advertising was supposed to save the day as AOL tore down its access wall, but that just isn't happening.

The company is dividing AOL in two, a move that will make it easier to smoke out a pair of buyers for both its online access and content businesses, but that will leave an even sleepier company behind.

Without cable and AOL, Time Warner will be down to filmed entertainment, networks, and publishing. This may not seem so bad, given the success of The Dark Knight and the cable-world consistency of HBO, but dips in Time Warner's publishing business are eating into the baby growth steps elsewhere.

Time Warner is $2.8 billion into a $5 billion share buyback it announced last summer, but it didn't buy any shares this past quarter. Wow. You have to go back five years to find the share price lows that Time Warner hit this summer, and the company isn't nibbling after buying in at much higher prices over the past year? That isn't very reassuring.

The company also reaffirmed its adjusted operating income guidance yesterday (up 7% to 9% this year), but warned that it was trending toward the low end of that range. In short, Time Warner isn't all that attractive now, and it will be even less attractive once it unloads some of its more dynamic parts.

Good newsAs I have every week, I don't talk down a stock unless I have three alternatives that I believe will outperform the company getting the heave-ho. Let's go over the three fill-ins.

Marvel(NYSE:MVL) -- If The Dark Knight's box office success is drawing you toward Time Warner, you're better off with Marvel. It's the pure play on the Hollywood trend toward superhero blockbusters, and Marvel's Iron Man this year was no slouch.

Google(NASDAQ:GOOG) -- Google is the company serving up paid search ads on AOL's website. That is the sexy side of AOL. You don't want to get bogged down in the fading access business. United Online(NASDAQ:UNTD) wouldn't be buying up florist lead-generators, loyalty shopping sites, and the Classmates.com social site if it felt strongly about its access business. Google is the world leader in online advertising, and there is no reason to settle for less now that it's trading for just 20 times next year's earnings.

Disney(NYSE:DIS) -- If you want exposure to filmed entertainment, networks, and publishing, check out Disney. Time Warner has topped analyst estimates just once over the past year, while Disney has done it every single quarter for a couple of years now. Disney also has the killer cable property ESPN, and a few monster movie franchises like Pirates of the Caribbean, Narnia, and anything that Pixar touches. I'll put that up against Time Warner's Batman and what's left of the Harry Potter series in a heartbeat. Both Disney and Time Warner are trading for just more than 12 times next year's earnings, but Disney is the one built to last. If you want an even cheaper media conglomerate play, Viacom(NYSE:VIA) commands an even cheaper multiple with great cable properties like Nickelodeon and MTV.

Invest carefully and don't forget to separate your trashed stocks from ones that can be recycled.

Longtime Fool contributor Rick Munarriz wonders if he will be the last AOL subscriber standing. He does not own shares inany of the stocks in this story, save for Disney. Rick is part of the Rule Breakers newsletter research team, seeking out tomorrow's ultimate growth stocks a day early. The Fool has adisclosure policy.

Author

Rick has been writing for Motley Fool since 1995 where he's a Consumer and Tech Stocks Specialist. Yes, that's a long time with more than 20,000 bylines over those 22 years. He's been an analyst for Motley Fool Rule Breakers and a portfolio lead analyst for Motley Fool Supernova since each newsletter service's inception. He earned his BBA and MBA from the University of Miami, and he splits his time living in Miami, Florida and Celebration, Florida.
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